UPDATE: Debenhams Plans To Reinstate Dividends In 2011

Department store chain Debenhams PLC (DEB.LN) Thursday posted a 21% rise in fiscal year pretax profit, adding that it expects to reinstate dividends at the half-year stage next year.

Chief Executive Rob Templeman said, "Although we remain concerned about the general retail environment, we are encouraged by the start to the new financial year which has seen positive like-for-like sales and gross margin in the early weeks."

The news sent shares in the company up 4.2% to 71p at 0842 GMT.

Templeman said the company will continue to focus on managing gross margins, driving market share and growing through expansion and investment.

Pretax profit before exceptional items rose to GBP151 million for the 12 months to Aug. 28 from GBP125.2 million last year--slightly ahead of guidance. Sales rose 9.6% to GBP2.56 billion.

The second-largest department store chain in the U.K. by sales behind Marks & Spencer Group PLC (MKS.LN) has been increasing its higher-margin own brand products, which has helped grow profits even as sales growth has tempered.

Fiscal year net profit edged higher to GBP97 million from GBP95.1 million a year ago.

Investec said in a note to clients Thursday that it believes the "self-help available to Debenhams on margin underpins the profit outlook for the current year," and raised its full year 2011 pretax profit forecast to GBP164 million from GBP157 million.

The broker has a buy recommendation on the stock.

The company said it intends to recommence dividends in April 2011, targeting an initial level of dividend cover of around three times adjusted earnings per share.

Debenhams stopped paying a dividend in 2009, choosing instead to invest the money in new stores and to avoid adding to its substantial debt pile.

It had been loaded with debt by its private equity owners prior to listing on the London Stock Exchange in May 2006.

After raising GBP323 million last year to pay down some of its debt, the company's net debt at 28 August 2010 was GBP516.8 million, down GBP73.5 million on the year earlier period.

Debenhams has 160 stores in the U.K. and Ireland, six in Denmark and 60 franchised outlets abroad.

Retailers across the U.K. are braced for further belt-tightening from consumers amid the fallout of the government's spending review, set out Wednesday, which included public sector job losses and decreased welfare payments.

Clothing retailers also face rising raw materials costs as the price of cotton hovers at 15-year highs. Passing on this cost increase to consumers could prove difficult in the economic climate.

Debenhams said there is already evidence of price inflation in the U.K. clothing sector but that its sourcing model allows it to offset some elements of these rising costs.

Panmure Gordon analyst Jean Roche said this may imply some margin pressure in 2011. She also noted the group has relatively high exposure to public sector pay freezes and job cuts.

-By Kathy Gordon, Dow Jones Newswires; 44-207-842-9293; kathy.gordon@dowjones.com

Debenhams (LSE:DEB)
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